Estate Planning – Creating a Trust for the Family Home [Part 1 of 3]

Putting one’s home into a trust is an increasingly popular strategy for aging homeowners and their families who want to ensure that the parents’ home is transferred to their survivors with a minimum of fuss and the fewest possible tax liabilities. It’s an excellent way both to preserve the value of what is often one’s chief asset for one’s heirs and to avoid the complexities and potential risks that can come with a traditional inheritance scenario. Unlike a will, the contents of which are part of the public record, the terms of a trust are private. And unlike a will, a trust is not subject to the review and possible challenge to the extent to which wills that are going probate are exposed. Nor will the heirs have to bear the burden of probate fees which can eat up to 7 percent of the home’s value – or wait for the process to end to gain ownership of the property.

The two general types of trust used most often for this purpose are the revocable trust and the irrevocable trust. In either instance the trust becomes the holder of the property and can exempt it from the standard process of inheritance. It can be structured with precise terms for disposing of the property involved. The revocable trust is the most popular, since it can be revoked, altered or amended at any time by the party creating the trust. Upon the death of that party, though, a revocable trust becomes an irrevocable trust, which, as the name implies, cannot be altered or revoked. Because of its flexibility, and the fact that the trustee, in most cases the person setting up the trust, retains essential control over the assets, a revocable trust answers the needs of most people. For these very reasons, though, it will not protect your assets from creditors, who can force the dissolution of a revocable trust and the surrender of any assets it may hold.

It’s also important to understand when a trust is not needed. The surviving spouse will automatically assume full ownership of a jointly-owned property without probate or any of the processes or inheritance taxes an heir would have to endure. So a trust is only useful for protecting assets that you want to leave to someone other than a co-owning spouse. They can be a useful way of ensuring that other designated heirs receive the property after the death of a spouse, something that cannot be guaranteed by a simple will. A third variation, called a Qualified Terminable Interest Property trust or QTIP trust can also be used in some limited instances to steer the disposition of property to a future heir. A trust can also be useful in protecting your property from being sold or mortgaged at some later point when a parent may be impaired or disabled and the property subject to financial dealings, unscrupulous or otherwise, that they may not be in a position to evaluate properly.

The amount of tax savings, if any, that are possible with a trust arrangement will vary according to each individual’s situation and often depend on the nature and size of other assets in one’s estate and where they are located. There is no guarantee that any savings will accrue unless the trust is structured along with other assets to create them. In some cases, property in a revocable trust may still be subject to federal and state taxes. It is essential to consult a tax professional to find out which strategy suits you best and how to structure any trusts that seem appropriate to your needs.

There are likely to be sizable upfront expenses involved in setting up a trust, mostly in the form of legal fees. You will need to transfer ownership of the home to the trust, a process that requires the review and approval of lenders as well as no small amount of official paperwork. And you will still need to have a will to specify your wishes on all of your other assets. Also for anyone hoping to qualify for Medicaid coverage in the expensive last stages of life, any assets held in a living or revocable trust controlled by you are considered your assets. You will want to weight these disadvantages against any presumed advantages before you go down this road.

Author: Paul McLaughlin

Paul McLaughlin is thoroughly familiar with the workings of Litchfield Bancorp. He started his career at the Bank as a teller in 1990 and was soon promoted to customer service representative and mortgage originator. Paul was then named manager of Litchfield Bancorp's Washington office in 1995 and, two years later, was promoted to assistant vice president and manager of the Oakville office.
As vice president for retail banking, a promotion Paul earned in 2002, he became responsible for all sales and marketing - including training, product development and customer service - for the bank's five-branch network. In 2005, Paul completed a program at the highly regarded American Bankers Association's School of Bank Marketing and Management. In 2009, he was named senior vice president at the bank and in 2013, was also promoted to Chief Operating Officer. Paul is an active community volunteer. He served as chairman of the 2008 United Way fundraising campaign for Northwest Connecticut and continues to reflect the Bank’s deep commitment to community service.
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